Noob question regarding execution only broker and ACC funds

corum_uk67

Hi,

I'm dipping my toe into investments in a small way and as well as dropping some funds into funding circle have opened a sharedealing account with x-o.

Each trade has a fee attached so I was wondering what happens if someone buys into an ACC (as opposed to an INC) fund. As the dividends are reinvested in the stock does this count as a separate 'trade' each time and therefore have a brokers fee attached?

Regards.

bowlhead99

With an Acc fund the fund manager never pays out any dividends hence your broker or fund platform does not need to carry out any transactions on your behalf. The income generated is ACCumulated within the fund so your broker never gets the chance to do anything with it, because it doesn't leave the fund.

X-O is an example of a cheap execution-only broker that doesn't offer a fund platform (i.e. a platform on which you can hold OEICs or Unit Trusts), so the point is rather less relevant than it would be with other providers who offer several thousand "fund" options of the Inc or Acc flavour.

Of course you can get some "accumulating" ETFs which will save you paying reinvestment fees because there isn't anything to reinvest. Not all ETFs have that facility though, it's much more popular in the world of OEICs and ITs.

corum_uk67

Ah ok, so I think what your saying is that i wouldn't have the option to buy many of the available funds via x-o anyway.

I purchased a number of ISHARES ftse 100 ETF shares yesterday via x-o and although i'm sure they have an ACC version x-o only seemed to list the dividend paying version, so that's what I went with.

Assuming I did buy an ACC ETF via x-o, would the 'accumulated' shares be automatically posted to my holdings balance, instead of the income from dividends?

bowlhead99

No: with accumulation you do not get any more shares. The shares that you have, are simply more valuable than they would have been if they were "distribution" or "income" shares.

Imagine a million pound fund that has issued a million units at a pound each. Over the year it earns 1% dividend income so that at the end of the year the fund has a million of investments and £10k cash, so each unit in the fund is worth £1.01 each.

If it is a distribution or "Inc" fund it will distribute the cash income and each shareholder will get a penny of cash. They will then have in one hand their investment unit, now worth £1.00, and in the other hand some cash, worth £0.01. Some shareholders that have 100 units might like to use their £1 total cash to buy one more unit. So now they have 101 units, all worth £1 each for £101 total value.

Meanwhile the ACC fund does *not* pay out. Consequently its units don't fall in value to £1.00 each, they stay at £1.01 and the fund just goes and buys more investments with its £10k cash. If you have 100 units of the acc fund it's worth £101, just like the other guy with his 101 units of Inc fund at a lower price.

Of course, the guy manually reinvesting his dividend income might pay more broker fees than the guy who never has to lift a finger, if he's using a broker that charges per transaction. Though some fund platforms don't charge per transaction, and simply charge an annual fee instead.

The Inc fund is simpler to work with if you're not using an ISA or pension wrapper, because you can easily track what you bought when and for how much, which helps your tax records (instead of being allocated dividends which are reinvested inside the fund which you forget to record)

corum_uk67

Thanks, that does make things clearer and also explains why, when I've looked at the same ETF but with options for ACC or INC, the ACC share price is so much higher.

corum_uk67

Ok so,

Having invested in a ftse 100 etf via x-o, i'm now thinking of buying a similar modest amount (a few k) in shares in the ishares s&p 500 etf. Both ACC and INC appear to be available through x-o (at $195 and $21 respectively).

I'm a bit uncertain however regarding the fact that the prices are in USD and so I guess whether I get a good deal or not will depend on what exchange rates are applied by x-o at the time of the deal?

In the longer term I guess there is also uncertainty due to fluctuations in exchange rates?

Any tips or advice would be welcome.

Regards.

AndyT678

Getting a "good deal" shouldn't rely on hitting a day in the month with a favorable exchange rate. If the decision is that marginal then you probably should keep looking. If you believe that the S&P will give a good return over the time that you're invested then the spot rate should be irrelevant. I'm sure that X-O would tell you what rates they use when buying a USD fund if you asked them. Hopefully one that doesn't take the p1ss too much.

You are correct that owning a foreign currency denominated asset exposes you to volatility and risk from FX movements. If the dollar tanks after you buy in then you could end up with a loss in GBP even if the shares rise in price but you either take it or leave it really unless you want to try to hedge against it.

You should also consider that you already have this risk in your FTSE fund anyway.It's just hidden in the results of the individual companies. Many of the FTSE 100 have significant foreign currency revenue streams. If the £ gets stronger then their overseas GBP earnings decrease and vice versa.

grey_gym_sock

corum_uk67 wrote: »

Having invested in a ftse 100 etf via x-o, i'm now thinking of buying a similar modest amount (a few k) in shares in the ishares s&p 500 etf. Both ACC and INC appear to be available through x-o (at $195 and $21 respectively).

I'm a bit uncertain however regarding the fact that the prices are in USD and so I guess whether I get a good deal or not will depend on what exchange rates are applied by x-o at the time of the deal?

In the longer term I guess there is also uncertainty due to fluctuations in exchange rates?

many ETFs, including these 2, are traded (on the london stock exchange) in both USD and GBP. there is a different code (called the EPIC or TIDM) for each currency.

for the Acc version of ishares S&P 500 ETF, the code CSP1 is the 1 traded in GBP.

for the Inc version ... well, i wouldn't use that 1, because it has higher on-going charges (0.40% instead of 0.07%); an alternative for Inc is vanguard S&P 500 ETF, which has code VUSA for trading in GBP (and on-going charges of 0.07%).

the prices in GBP and USD, for the same ETF, will always closely match, reflecting the current USD-GBP exchange rate. so in the long term, it makes little difference which you use. i would suggest trading ETFs in GBP, only because if you buy the USD line, then x-o will presumably be automatically converting your GBP to USD, and charging for doing so, so you'd lose a little on the purchase. and when you eventually sell, they'd charge again to convert the USD from the sale back to GBP. so sticking to the GBP line of ETFs avoids the possibility of losing a fraction in currency conversion charges.

regardless of which line you use, the value of your investment can be affected by changes in exchange rates. e.g. if the S&P 500 goes up 10% (in USD, which is how it's quoted, and how all the shares it includes are traded), but meanwhile the GBP rises 10% against the USD, then your investment gains in GBP would be approximately 0. but if instead the USD rose 10% against the GBP, then your investment gains in GBP would be about 20%.

all that applies regardless of which line of the ETF you buy. e.g. suppose you can can buy the USD line for $195 or the GBP line for £125 (implying an exchange rate of 1.56). suppose (to keep it simple) that the S&P 500 value in USD doesn't change, but that the exchange rate moves to 1.50. then the USD line would still be trading at $195; the GBP line would be trading at about £130, reflecting the new exchange rate. so would you have been better off buying the GBP line? no (except for cost differences, mentioned above), because you've gained the same amount in the USD line, despite its price being unchanged: if you sold it, the proceeds would be about £130 (ignoring currency conversion costs).

in general, overseas shares tend to be more volatile than UK shares, because you have the effects of exchange rate fluctuations, on top of the effects of volatile share prices. however, this may even out in the long run - sometimes you gain on exchange rates, sometimes you lose - and only buying UK shares would be a rather narrow investment (less than 10% of the global value of shares), so it can be worth putting up with the greater volatility in order to have more diversified investments.

on a broader issue: if your share portfolio will consist of just UK and USA trackers, then that is leaving out a lot of the world. to get broader coverage, you could either add trackers for each of the remaining investment regions, viz.:
- europe ex-UK
- japan
- asia/pacific ex-japan
- emerging markets (though personally i'm not keen on emerging markets - but that's a different debate);
or you use a world tracker instead of separate regional trackers.

corum_uk67

Hi,

I have another question if someone can assist. I was looking at ordering some LYXOR FTSE 250 etf shares. On Trustnet and the LSE it lists the sedol code as B1WMNV2.

When i enter this into the order page on x-o it translates to L250.L, which is fine, but it lists the instrument as 'LYXOR INTL AM FTSE 250 NAV' on the right and shows the price as being £16.50, which is totally different to the closing prices of £20.20 and £20.30 shown on the LSE and Trustnet.

I don't want to place an order for the wrong instrument so thought i'd better check if i'm missing something.

https://www.dropbox.com/s/p8akp02p0spxhjk/2015-07-26%2012_49_51-Buy%20and%20sell.jpg?dl=0

Thanks.

masonic

It's not uncommon for prices to go a bit squiffy on trading platforms outside of market hours.

grey_gym_sock

putting B1WMNV2 (the SEDOL) into the search-for-shares box on HL's site gives me the same thing as putting L250 (the EPIC/TIDM), so they do appear to be the same thing.

i wouldn't use that FTSE 250 tracker, though ... HL say it has on-going charges of 0.35%, and an indicative spread (i.e. the difference between the prices to buy and sell it) of 0.52% ... i'd use vanguard's FTSE 250 tracker instead, which is VMID (EPIC/TIDM), and has on-going charge of 0.1%, and indicative spread of 0.25%.

in general for ETFs, i'd first look at vanguard - they tend to be the cheapest, and are owned by investors in their funds, so their charges are almost "at cost", and they cut them when they can.

my second choice would be ishares, who have some extremely cheap ETFs, and a very broad range of more obscure (but not quite so cheap) ETFs.